Coffee culture in India is flourishing thanks to the efforts of a few specialist coffee chains and the instant coffee players, says a new report from Rabobank.

Coffee drinking has spread across the country and consumption has doubled. Specialist coffee shop chains, which have established themselves as hangouts for urban youth, are projected to reach 4,000 in number by 2015, with a growth rate of 21%.

This increase comes as a result of favourable demographics, rising income levels, the charge of mid-sized cities and an overall high population density. However, high real estate costs, manpower attrition and difficulties in managing the supply chain will continue to be coffee’s key challenges.

Although the contribution of specialist coffee chains to India's total coffee consumption by volume may not be significant, these coffee shops have added greater visibility to coffee culture.

First-mover advantage

India’s first specialist coffee shop—a Café Coffee Day—opened in 1996, and the company has since grown to a market-leading position, with 1,350 coffee shops spread across India. At present, there are around 2,100 specialist coffee shops in the country, and given that a number of international coffee shop chains are trying to expand their base there in this important market, consumers are likely to have even more options over the next three years.

Coffee chains are also offering a new snacking and leisure experience for a fast-growing segment of the population, and do so in a way similar to that in developed markets.

"The impressive growth expected of specialist coffee chains in India offers numerous opportunities for both local and international players, provided that they can overcome inherent obstacles" says Nitin Kalani, beverage analyst at Rabobank International, and author of the report.

Still some challenges

Sourcing coffee beans is not a barrier for specialist coffee chains as they account for an negligible proportion of the total cost of a cup of coffee. For example, the cost of coffee beans in a cappuccino is relative to around 8% of its sale price.

However, to be successful, operational efficiency, and especially managing rent and manpower costs, is more important than focusing solely on raw material costs.

Real estate overheads are a major concern, with coffee chains facing strong competition to acquire prime premises. Furthermore, coffee shops must be big enough to accommodate a large number of people, with around 95% of consumers in India preferring to drink on-site rather than to take away. This compares to around 60 per cent in the US.

Competition for industry manpower is likely to continue to be a challenge due to high rates of staff attrition. On top of this, the sourcing of other beverages, food and merchandising—all an essential parts of the coffee shop experience—remain a problem as players struggle to establish strong and reliable supplier relationships.

India continues to be a tea-drinking country, with sales of the traditional beverage still much higher than of coffee. With growth in coffee consumption outpacing that of tea however, India’s new coffee culture is expected to flourish for the foreseeable future.